12-2011 NEWS&ANALYSIS 41ELR11091

C O M M E N T S

Treatment of CERCLA Claims for Hazardous Waste Cleanup

Costs in Bankruptcyby.Christopher.Dow

Christopher.Dow.is.an.environmental.attorney.with.over.14.years.of.experience.representing.public.and.private-sector.clients.in.a.wide.range.of.complex.environmental.regulatory.and.litigation.matters ..He.has.

successfully.defended.a.variety.of.clients.in.large,.multiparty.hazardous.waste.cleanup.cases .

I. Recession’s Impact on Cleanup Litigation

According.to.a.September.2010.report.of.the.Business.Cycle.Dating.Committee.of. the.National.Bureau.of.Economic.Research,.the.nationwide.recession.that.began.in.Decem-ber.2007.ended.in.June.2009,.although.this.fact.does.not.mean.that.economic.conditions.since.that.time.“have.been.favorable.or.that.the.economy.has.returned.to.operating.at.normal. capacity .”1. In. this. challenging. economic. climate,.it. is.not.uncommon.for. some.companies.who.are.poten-tially.responsible.parties.(PRPs).involved.in.hazardous.sub-stances.cleanup.litigation.under.the.federal.Comprehensive.Environmental. Response,. Compensation,. and. Liability.Act.(CERCLA)2.to.file.for.bankruptcy.protection ..Where..government.authorities.propose.to.spend.millions.of.dol-lars.to.clean.up.hazardous.substances.at.a.site,.and.where.one.or.more.of.the.PRPs.potentially.liable.for.these.costs.files.for.bankruptcy.protection,.the.following.question.nec-essarily.arises:.What.steps.can.the.remaining.solvent.PRPs.involved.in.the.litigation.take.to.try.to.ensure.that.funds.of.the.insolvent.PRP.(debtor-PRP).are.preserved.for.cleanup?.The.answer.can.depend.in.part.on.what.CERCLA.claims.for.relief.a.solvent.PRP.is.asserting,.i .e .,.a.CERCLA.§107.claim.for.cleanup.costs.that.the.PRP.has.itself.expended.to.clean.up.a.site,.or.a.CERCLA.§113.claim.for.contribution.for.any.costs.that.the.PRP.may.have.to.pay.over.to.another.PRP,.or.the.state.or.federal.government,.who.has.incurred.costs.in.cleaning.up.hazardous.substances.at.a.site .

II. Cost Recovery and Contribution Claims in Bankruptcy

The.“principal.purpose”.of. the. federal.Bankruptcy.Code.(the. Code). is. to. preserve. the. assets. of. the. “honest. but.unfortunate. debtor,”. so. that. these. may. be. distributed.

1 .. See.http://www .nber .org/cycles/sept2010 .html .2 .. 42.U .S .C ..§§9601-9675,.ELR.Stat ..CERCLA.§§101-405 .

among.creditors. in.a.final. satisfaction,.or.“discharge,”.of.these.debts,.and.to.enable.the.creditor.to.get.an.economic.“fresh. start .”3.The.Code.defines. “debt”. as. a. “liability. on.a. claim .”4. A. “claim”. is. broadly. defined. by. the. Code. to.include. virtually. any. right. to. payment,. even. if. the. right.is. not. certain,. but. is. “disputed,”. “unliquidated,”. “unma-tured,”. or. “contingent .”5. The. U .S .. Supreme. Court. has.determined.that.a.debtor’s.state-law.environmental.liability.can.be.a.“claim”.subject.to.discharge.under.the.Code.if.the.creditor’s.claim.for.relief.amounts.to.a.suit.for.the.payment.of.money .6.More.specifically,.other.courts.have.determined.that. a. claim. for. incurred. response. costs. brought. under.CERCLA.§107.is.a.“claim”.that.can.be.discharged.under.the.Code,.even.if.that.claim.is.brought.by.the.government.or.a.state.government .7.As.a.general.rule,.a.PRP.who.holds.a.claim.participates. in. the.debtor-PRP’s.bankruptcy.case.and. in. the. bankruptcy. distribution .8. However,. there. are.exceptions.to.this.rule .

Many.courts.have.“disallowed”.a.creditor-PRP’s.CER-CLA.§113.claims.from.proceeding.in.bankruptcy .9.That.is,.CERCLA.contribution.claims.are.generally.not. included.in. the. debtor’s. bankruptcy. estate,. and. therefore,. unlike.allowed. claims,. do. not. have. a. chance. to. be. partially. or.fully.satisfied.by.any.monies.from.the.bankruptcy.estate ..This.is.because.the.Code.provides.that.a.bankruptcy.court.

3 .. Marrama.v ..Citizens.Bank.of.Massachusetts,.549.U .S ..365,.367.(2007);.11.U .S .C ..§§101-1532 .

4 .. 11.U .S .C ..§101(12) .5 .. 11.U .S .C ..§101(5) .6 .. Ohio.v ..Kovacs,.469.U .S ..274,.282-83,.15.ELR.20121.(1985) .7 .. See,�e.g.,.In.re.Chateaugay.Corp .,.944.F .2d.997,.1005,.21.ELR.21466.(2d.

Cir ..1991);.In.re.Jensen,.127.B .R ..27,.33.(B .A .P ..9th.Cir ..1991),.aff’d,.995.F .2d.925,.23.ELR.20991.(9th.Cir ..1993) .

8 .. See.11.U .S .C ..§§726,.1129 .9 .. See,�e.g.,.In.re.Eagle-Picher.Industries,.Inc .,.131.F .3d.1185,.1190,.28.ELR.

20492.(6th.Cir ..1997);. In. re.Hemingway.Transport,. Inc .,.993.F .2d.915,.923,.23.ELR.20953. (1st.Cir .. 1993);. In. re.Charter.Co .,. 862.F .2d.1500,.1503.(11th.Cir ..1989);.In.re.Eagle-Picher.Industries,.Inc .,.144.B .R ..765,.770.(Bankr ..S .D ..Ohio.1992),.aff’d,.164.B .R ..265.(S .D ..Ohio.1994);.In.re.Eagle-Picher.Industries,.Inc .,.197.B .R ..260,.277.(Bankr ..S .D ..Ohio.1996);.In.re.Cottonwood.Canyon.Land.Co .,.146.B .R ..992,.997.(Bankr ..D ..Colo ..1992) .

Copyright © 2011 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.

41ELR11092 ENVIRONMENTALLAWREPORTER 12-2011

“shall.disallow.any.claim.for.reimbursement.or.contribu-tion.of. an. entity. that� is� liable�with� the�debtor. .  .  .. to. the.extent.such.claim. .  .  ..is.contingent.as.of.the.time.of.allow-ance.or.disallowance.of.such.claim.for.reimbursement.or.contribution .”10. In. other. words,. in. a. situation. where. the.creditor-PRP. and. the. debtor-PRP. are. both. potentially.liable.to.a.third.party,.such.as.the.government.or.another.PRP,.for.the.same.cleanup.costs.at.a.site,.the.bankruptcy.courts.will.not.allow.the.creditor-PRP.to.collect.from.the.debtor-PRP.via. the.creditor-PRP’s.claim.for.contribution.under.CERCLA.§113 ..The.rationale.is.that.the.Code.dis-courages.two.parties.from.competing.to.collect.the.same.debt.from.the.debtor-PRP.where.the.purpose.of.the.Code.“is. to. preclude. redundant. recoveries. on. identical. claims.against. insolvent. estates. in. violation. of. the. fundamental.Code. policy. fostering. equitable. distribution. among. all.creditors. of. the. same. class .”11. A. CERCLA. §113. claim. is.therefore. disallowed. unless. the. creditor-PRP’s. CERCLA.liability.is.determined.and.it.has.paid.monies.over.to.the.third. party. to. satisfy. this. liability,. thereby. negating. the.possibility.that.the.third.party.will.also.pursue.the.debtor-PRP.for.these.monies .12

Given.the.often.slow.pace.of.multiparty.CERCLA.liti-gation,. as. compared. to. the. relatively. speedy. bankruptcy.process,. in. the. vast. majority. of. cases,. it. is. unlikely. that.a. creditor-PRP’s. CERCLA. liability. will. be. determined,.and. monies. paid. over,. before. the. “bar. date”—the. dead-line.for.creditors.of.the.insolvent.PRP.to.file.their.proofs.of.claim.with.the.bankruptcy.court ..In.fact,.it.appears.that.all.courts.that.have.addressed.the.treatment.of.CERCLA.§113.actions.in.bankruptcy.have.found.that.these.claims.must.be.disallowed ..Therefore,.it.is.more.than.likely.that.a.PRP’s.pending.CERCLA.contribution.suit.will.amount.to.a.claim.that.has.no.chance.to.receive.payment.from.the.debtor-PRP’s.bankruptcy.estate.under.the.Code .

Meanwhile,. a. creditor-PRP’s. claims. based. on. a. CER-CLA. §107. suit. for. cost. recovery. are. allowed. to. proceed.in. bankruptcy. and. to. potentially. share. in. any. distribu-tion.from.the.debtor’s.bankruptcy.estate .13.This.is.because,.unlike. a.CERCLA.§113.contribution.claim,. a.CERCLA.§107. claim. does. not. involve. shared. liability. to. a. third.party.that.could.result. in.the.creditor-PRP.and.the.third.party. competing. for. the. same. funds. in. the. debtor-PRPs.bankruptcy.estate .14.Thus,.allowing.a.creditor-PRP.with.a.CERCLA.§107.claim.the.opportunity.to.collect.from.the.bankruptcy.estate.does.not.run.afoul.of.Code.policy .

10 .. 11.U .S .C ..§502(e)(1)(B).(emphasis.added) .11 .. In.re.APCO.Liquidating.Trust,.370.B .R ..625,.634.(Bankr ..D ..Del ..2007) .12 .. Id ..at.636.(citing.authority.from.bankruptcy.courts. in.the.U .S ..Court.of.

Appeals.for.the.Second,.Third,.and.Sixth.Circuits) .13 .. See,�e.g .,.In.re.Dant.&.Russell,.Inc .,.951.F .2d.246,.248-49,.22.ELR.20239.

(9th.Cir ..1991);.In.the.Matter.of.Harvard.Industries,.Inc .,.153.B .R ..668,.672.(Bankr ..D ..Del ..1993) .

14 .. See�id.

III. “Piggy-Backing” Onto the Government’s Good Claim

A. case. can. arise. where. the. PRP. filing. for. bankruptcy. is.potentially. responsible. for. a. significant. portion. of. the.cleanup.at.a.site,.but.the.remaining.solvent.PRPs.have.only.asserted.CERCLA.§113.contribution.claims,.either.because.they.have.not.incurred.their.own.costs.of.response.at.the.site,.or. are.otherwise.precluded. from.bringing.CERCLA.§107.cost-recovery.claims ..For. instance,. if. the.remaining.PRPs.were.compelled.to.clean.up.the.site.by.government.authorities,.they.may.have.no.claim.for.relief.for.CERCLA.cost. recovery,. and. may. only. bring. CERCLA. contribu-tion.claims .15.Further,.the.government.may.decide.not.to.pursue. the. insolvent. PRP. in. bankruptcy,. or. may. simply.neglect. to. file. a. proof. of. claim. before. the. bar. date .16. In.these.circumstances,.a.creditor-PRP.can.be.left.in.a.situa-tion.where.it.has.no.chance.to.recover.from.the.debtor-PRP.in.bankruptcy,.and.could.potentially.get.stuck.with.all.or.some.of.the.debtor-PRP’s.cleanup.share .

In. some. circumstances,. the. situation. discussed. above.can.be.avoided ..A.creditor-PRP.that.does.not.have.a.via-ble. bankruptcy. claim. against. the. debtor-PRP. can. essen-tially.“piggy.back”.onto.the.federal.or.state.government’s.CERCLA.§107.or.other.bankruptcy-viable.claim.by.filing.a.proof.of.claim.on.the.government’s.behalf.under.Code.§501(b) .. Code. §501(b). provides:. “If. a. creditor. does. not.timely.file.a.proof.of.such.creditor’s.claim,.an�entity�that�is�liable�to�such�creditor�with�the�debtor. .  .  ..may.file.a.proof.of.such.claim .”17.A.solvent.PRP.who.shares.CERCLA.liability.to.the.government.with.the.debtor-PRP.is.an.entity.who.is.liable.to.a.creditor,.i .e .,.the.government,.with.the.debtor-PRP ..In.the.context.of.a.CERCLA.case.where.several.PRPs.may.have.liability.to.the.government.for.the.same.contami-nated.site,.the.policy.underlying.Code.§501(b).is.to.avoid.a.situation.where.the.government.decides.to.pursue.only.the.solvent.PRPs.and.ignore.the.insolvent.PRP,.collects.mon-ies. from.the. solvent.PRPs.over.and.above. their.equitable.share.of.cleanup.costs,.and.leaves.the.solvent.PRPs.unable.to.collect.in.contribution.from.the.insolvent.PRP.where.the.debtor-PRP’s.bankruptcy.estate.is.now.fully.administered.and.all.debts.are.discharged .18.Using.this.“surrogate.claim”.procedure,.a.creditor-PRP.can.maximize.the.chances.that.at.least.some.of.the.debtor-PRP’s.bankruptcy.estate.will.be.set.aside.for.site.cleanup .

15 .. See,�e.g.,.Appleton.Papers.Inc ..v ..George.A ..Whiting.Paper.Co .,.572.F ..Supp ..2d.1034,.1042-43,.38.ELR.20231.(E .D ..Wis ..2008);.W .R ..Grace.&.Co .-Conn ..v ..Zotos.Int’l.Inc .,.559.F .3d.85,.9439.ELR.20066.(2d.Cir ..2009);.Ashland. Inc .. v ..GAR.Electroforming,. 729.F .. Supp .. 2d.526,. 544. (D .R .I ..2010) .

16 .. This.was.the.circumstance.in.In�re�Hemingway�Transport,.as.the.U .S ..Envi-ronmental.Protection.Agency.claimed.it.did.not.have.notice.of.the.debtor-PRP’s.bankruptcy.filing ..993.F .2d.915,.923.n .14,.23.ELR.20953.(1st.Cir ..1993) .

17 .. 11. U .S .C .. §501(b). (emphasis. added);. In. re. Hemingway.Transport,. Inc .,.993.F .2d.at.927.(referring.to.such.a.filing.as.the.“surrogate-claim.procedure”.and.pointing.out.that.this.procedure.is.unnecessary.if.the.government.files.its.own.proof.of.claim) .

18 .. In�re�Hemingway�Transport,.993.F .2d.at.927.n .14 .

Copyright © 2011 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.

12-2011 NEWS&ANALYSIS 41ELR11093

IV. Priority for Government Cleanup Cost Claims

A. potential. advantage. of. filing. a. claim. on. behalf. of. the.government. is. that. government. CERCLA. claims. have.been.granted.payment.priority.over.other.competing.bank-ruptcy.claims.by.the.courts,.and.are.therefore.more.likely.to.receive.payment.from.the.bankruptcy.estate.than.environ-mental.claims.by.private.PRPs ..Because.the.Code.creates.no.payment.priority.for.environmental.claims,.the.general.rule.is.that.environmental.claims.have.only.general.unse-cured.status .19.However,.some.courts.have.elevated.a.gen-eral.unsecured.environmental.claim.of.the.federal.or.state.government.to.an.administrative.expense .20.Administrative.expenses.are.entitled.to.payment.priority.over.general.unse-cured. claims,21. and. are. defined. as. “the. actual,. necessary.costs.and.expenses.of.preserving. the.estate .”22.One.court.has.opined. that. a. surrogate.claim.filed.by.a.private.PRP.on.behalf.of.the.government.would.compel.a.bankruptcy.estate. to. set. aside. monies. for. the. government’s. cleanup.efforts.regardless.of.the.government’s.decision.to.not.file.a.claim.on.its.own.behalf .23.That.a.surrogate.claim.would.be.treated.the.same.as.a.claim.filed.by.the.government.itself.leads.to.the.conclusion.that.a.surrogate.claim.could.also.be.treated.as.an.administrative.expense,.and.receive.priority.over.general.unsecured.claims .

In. the. majority. of. cases,. the. government’s. or. a. state’s.CERCLA.cleanup.costs.are.given.administrative.expense.priority. where. the. contaminated. site. at. issue. is. actually.owned.by.the.debtor.and.therefore.part.of.the.assets.of.the.bankruptcy. estate .24. The. rationale. is. that. the. cleanup. of.the.debtor’s.property.preserves.the.value.of.the.bankruptcy.estate. as. allowed.by. the.Code .25.On. the.other.hand,. the.priority.is.denied.where.the.contaminated.property.is.not.owned.by.the.debtor,.but.only.leased .26.This.is.likely.due.to.the.fact.that.efforts.to.clean.up.property.not.owned.by.the.estate.do.not.preserve.the.assets.of.the.estate .27

There. is.also. the.possibility. that.a.government’s.CER-CLA. cleanup. costs. are. entitled. to. an. even. higher. pay-

19 .. 11.U .S .C ..§507;.In.re.Virginia.Builders,.Inc .,.153.B .R ..729,.733,.24.ELR.20147.(Bankr ..E .D ..Va ..1993) .

20 .. See,�e.g.,.In.re.Chateaugay.Corp .,.944.F .2d.997,.1009,.21.ELR.21466.(2d.Cir ..1991);.In.re.Wall.Tube.&.Metal.Prod ..Co .,.831.F .2d.118,.124,.18.ELR.20013. (6th.Cir .. 1987);. In. re.Distrigas.Corp .,. 66.B .R ..382,.386. (Bankr ..D ..Mass ..1986);.In.re.Stevens, 68.B .R ..774,.783,.17.ELR.20491.(D ..Me ..1987) .

21 .. 11.U .S .C ..§507(a)(1) .22 .. 11.U .S .C ..§503(b)(1)(A) .23 .. In�re�Hemingway�Transport,.993.F .2d.at.928 .24 .. See,�e.g.,.In�re�Chateaugay�Corp.,.944.F .2d.at.1009;.In�re�Wall�Tube�&�Metal�

Prod.�Co.,.831.F .2d.at.124;.In�re�Distrigas�Corp.,.66.B .R ..at.386;.In�re�Ste-vens,.68.B .R ..at.783 .

25 .. See,�e.g .,.In.re.Dant.&.Russell,.Inc .,.853.F .2d.700,.709,.18.ELR.21312.(9th.Cir ..1988) .

26 .. Id .. (debtor-PRP.was. lessee) ..See�also.Southern.Ry ..Co ..v ..Johnson.Bronze.Co .,.758.F .2d.137,.141.(3d.Cir ..1985).(debtor-PRP.was.sublessee) .

27 .. See.In�re�Dant�&�Russell,.853.F .2d.at.709 .

ment.priority.under.the.Code.that.takes.precedence.over.creditors’.claims.that.are.secured.by.collateral,.or.secured.claims .. This. higher. payment. priority,. or. “super-priority”.lien,.is.authorized.by.§506(c).of.the.Code,.which.provides.that. the. bankruptcy. trustee. “may. recover. from. property.securing.an.allowed. secured.claim.the. reasonable,.neces-sary.costs.and.expenses.of.preserving,.or.disposing.of,.such.property.to.the.extent.of.any.benefit.to.the.holder.of.such.claim .”28. While. the. one. bankruptcy. court. decision. that.granted.super-priority.status.to.a.state.government’s.CER-CLA. claim. was. ultimately. vacated,29. another. court. has.suggested.that.there.are.circumstances.when.a.party.with.a.secured.claim.will.benefit.from.the.grant.of.super-priority.status.to.a.government.CERCLA.claim.for.cleanup.costs,.such. as. when. the. cleanup. costs. expended. would. restore.the.value.of.a.secured.creditor’s.collateral .30.For.example,.a.bank.that.holds.a.mortgage.collateralized.with.real.prop-erty.belonging. to. the.debtor-PRP.may.benefit.where. the.cleanup.would.preserve.the.value.or.facilitate.the.sale.of.the.property .31.How.courts.will.rule.on.this.remains.an.open.question.at.this.time,.but.the.preservation.of.the.value.of.the.bankruptcy.estate.may.favor.the.granting.of.a.“super-priority”.lien.in.some.circumstances .

V. Collecting Cleanup Monies From an Insolvent PRP

Many.factors.need.to.be.considered.in.order.to.determine.a.PRP’s.chances.of.collecting.cleanup.monies.from.an.insol-vent.PRP ..These.factors.include,.among.others,.the.types.of. environmental. claims. that. have. been. asserted. in. an.action,.the.extent.of.government.involvement.in.the.case,.and. whether. any. CERCLA. claims. asserted. against. the.debtor’s.estate.have.priority ..Therefore,.when.guiding.a.cli-ent.through.the.often.messy.intersection.of.CERCLA.and.the.Code,.it.is.essential.for.environmental.counsel.to.have.familiarity.with.fundamental.principles.of.bankruptcy.law.in.addition.to.CERCLA .

28 .. 11.U .S .C ..§506(c) .29 .. In. re. Better-Brite. Plating,. Inc .,. 105. B .R .. 912. (Bankr .. E .D .. Wis .. 1989),.

vacated�by.136.B .R ..526.(Bankr ..E .D ..Wis ..1990) .30 .. In.re.T .P ..Long.Chemical,.Inc .,.45.B .R ..278,.288,.15.ELR.20635.(Bankr ..

N .D ..Ohio.1985) .31 .. See�id .

Copyright © 2011 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.